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What is the future of MERCOSUR? A special publication was presented at INTAL-LAB. 25 years after the creation of the bloc, this report seeks to understand the new global challenges faced by integration and to establish a basis for a smart regionalism.

The debate on the future of the MERCOSUR is crucial to the future of Argentina and that of the region.

A strategic alliance with trade partners from the MERCOSUR and the rest of Latin America is a natural platform for Argentina to integrate politically, economically, and socially into the global arena in. The aim of this strategy is to generate greater development and well-being.

Argentina is seeking to take a qualitative leap toward global integration. That leap starts with forming closer and stronger ties with other MERCOSUR member countries and with other integration schemes, such as the Pacific Alliance.

Argentina and Brazil have recently begun to coordinate solutions to pending issues on the integration agenda, such as phytosanitary standards, exclusions, and other obstacles that continue to prevent them from achieving a truly efficient form of integration. The two countries have agreed to discuss negotiation strategies and trade and tourism promotion.

They are beginning to explore the possibility of establishing shared consulates so as to have joint representation in different parts of the world.

Two upcoming international events to be held in Buenos Aires, the WTO Ministerial Meeting in late 2017 and the 2018 G-20 Summit, should function as a springboard for better integration for Argentina and Latin America as a whole. This is why it is so important to work on a shared regional agenda for these gatherings.

Gustavo Beliz: A Broad Strategic Vision to Revitalize the MERCOSUR

The results of the “MERCOSUR Futures” report can be grouped into four strategic areas that encompass different aspects of integration.

The first of these is trade: we need to move toward an early harvest within the MERCOSUR and in Latin America as a whole. Given that 93% of the goods that are traded between the countries in South America are already tariff-free, this is about working on more sophisticated matters: items on this agenda that could bear fruit in the short term include the harmonization of standards, the elimination of nontariff barriers, a safeguard regime, and dispute settlement mechanisms.

The second key idea is productive techno-integration. Technology can be put to the service of better integration. Single windows for foreign trade are an example of how import and export costs can be brought down. There are many local initiatives that could help make integration into an economic policy tool that engages with the technological revolution that the world is going through, such as autoparts

manufacturers specializing as global suppliers, “anchor firms” that act as sources of systemic competitiveness, and giving a regional impetus to knowledge-based service exports.

The third sphere is sustainable development. The integration agenda cannot be separate from important development goals such as environmental sustainability and improving the incomes of broad swathes of the population. We could, for example, implement regional programs that contribute to expanding the use of renewable energies and establish tax incentives to protect the environment and promote the development of small-scale farmers through the use of new technologies. Such initiatives would help protect the ecosystem and ensure that the fruits of technology and integration improve everyone’s well-being.

The last point is granular governance. It is time for us to agree on a joint investment regime, leverage innovation through strategic government procurement, respond to China in unison, and guarantee transparency in physical connectivity projects.

The aim of the IDB is to improve the lives of those living in Latin America and the Caribbean. Part of that improvement comes from implementing smart, creative forms of integration that are oriented toward innovation and social inclusion. The IDB’s mandate translates into a goal of investing 15% of its portfolio in projects with integration components.

The IDB has US$24.5 billion invested in its active portfolio in the MERCOSUR and several of those projects will reduce barriers to integration. These initiatives are part of the strategy that foresees parallel work on the software and hardware of integration. In connection with the former, the IDB has provided loans for single windows for foreign trade (VUCEs) in Uruguay, Paraguay, Chile, and Peru. In 2016, Argentina also became part of this group following a US$73.6 million loan to implement the VUCE system. The key now is making these VUCEs interoperable through a joint platform that will encompass all of South America and eventually all of Latin America. The IDB is also supporting Argentina and Brazil’s initiative to facilitate trade by bringing their foreign trade procedures in line with one another, connecting their VUCEs, and strengthening the Argentina–Brazil Bilateral Production and Trade Commission. The IDB’s investments in physical connectivity include a loan of US$40 million in 2016 for the landmark Agua Negra Binational Tunnel between Argentina and Chile. The loan will support environmental studies, the binational management and oversight of the project, and the drafting of the call to tender. Other projects involve the optimization of the Cristo Redentor border crossing between the two countries, the upgrading of the Montevideo–Rivera Highway (which connects Uruguay, Argentina, Brazil), the new lanes on Route 19 between Santa Fe and Córdoba (part of the Brazil–Chile connection), and the construction of the El Dorado-Mayor Otaño Bridge between Paraguay and Argentina. Also on the table is an ambitious project for the Jesuit Mission tourist trail which includes Argentina, Brazil, Uruguay, Paraguay, and Bolivia and may expand to include Chile.

Alejandro Ramos: The New Normal and Technological Innovation

The texts included in the “MERCOSUR Futures” report seek to:

* Capture the effects of the new normal in global trade following the financial crisis.

* Explore the interaction between integration and technological innovation.

* Provide a medium-term outlook of both the past and the future.

* Come up with positive agendas for revitalizing the MERCOSUR.

The report is made up of five sections: an overview of the current state of affairs (2015–2017), negotiation paths (both external and internal), sectoral perspectives, innovation, and the environment.

The most tangible effect of the new normal in global trade on the MERCOSUR has been a sharp drop in exports. In January 2017, the annual moving average for the bloc’s total exports stood at US$22.2 billion, nearly 26% below the peak of March 2012. Imports have also contracted considerably (particularly in Brazil), as has intra-MERCOSUR trade: in 2016 this totaled US$38 billion, almost 40% less than the high point of 2011.

This state of affairs points strongly to the need for an urgent strategic approach, one that seeks to improve the performance of the external sector in all countries, which could well involve adapting and modernizing the MERCOSUR as a tool for competitiveness.

The interaction between integration and technological innovation is illustrated by the relatively positive performance of the agriculture sector in MERCOSUR countries. International production indicators for this sector show the MERCOSUR to be one of the regions with the most solid growth trends in the last decade. Thanks to the spread of innovations that have arisen since the 1990s, the region’s agricultural output now far outstrips the global average. However, in terms of the modern technological pattern (“producing more with less”), there is a clear gap between the MERCOSUR and the leaders of this technological revolution: the USA, Europe, and, perhaps surprisingly, China. The latter is, of course, the main market for the MERCOSUR’s extraregional agricultural exports. This lag can be seen most clearly in terms of product innovation, which hinders export diversification.

Together, these results constitute a call to intensify the MERCOSUR’s agricultural integration on two fronts: first, successfully unifying the bloc’s markets, which is an essential step toward developing regional value chains with an international presence; and second, creating a regional agricultural innovation system that rationalizes the use of R&D resources and helps the MERCOSUR adopt the same standards for efficiency and diversification as the world’s leading countries. The constructive principle of integration would also suggest that we seek synergies between the public and private sectors.

Sandra Polónia Rios: Priorities in the New Global Context

There is widespread consensus that the MERCOSUR needs to move toward a new phase in its development, with a more proactive external agenda. However, in setting out on this quest for greater international integration, the MERCOSUR is venturing into a hostile external environment that is marked by the downturn in the growth of world trade and increasing uncertainty around the future of megaregional agreements. We need to be clear that this new consensus in favor of greater global integration entails challenges both from within the bloc and outside of it. First, the structure of comparative advantages means that offensive interests are focused on products for which there are protectionist barriers in many markets, while its defensive interests seek to protect the internal market for locally produced manufactures and services. This combination has traditionally led to trade-offs that have brought the negotiations in question to a halt. The fact that the MERCOSUR has some of the highest levels of protection for industrial products in the world means that getting involved in these processes may possibly lead to nonreciprocal liberalization processes. The state of affairs outside the region is

marked by a more fragmented form of international governance and an upsurge in protectionist and nationalist narratives.

All these difficulties, however, must not deter the MERCOSUR from revitalizing its external negotiations. In this sense, the priority items on a potential agenda for the bloc would focus on very specific areas. For example:

* Adhering to plurilateral WTO agreements such as the Information Technology Agreement (ITA) and the Agreement on Government Procurement.

* Successfully concluding MERCOSUR–EU negotiations, a long-running process that has recently been relaunched.

* Working toward a wider free trade agreement for Latin America and the Caribbean, using the Pacific Alliance and MERCOSUR as fulcrums.

Trade in goods is reasonably deregulated in Latin America but it is not integrated. The region’s priority objective should be to tighten ties between the MERCOSUR and Mexico. At present, only Uruguay has an up-to-date free trade agreement with the latter. However, it is worth noting that negotiations are underway to make up for this enormous missing link in trade agreements between Latin American countries.

A key part of this process hinges on rules of origin within trade agreements. The MERCOSUR’s historic stance on rules of origin is out of step with the global consensus: its rigid regulations in this regard do not contribute to increasing competitiveness in a world where the trend is toward the vertical relocation of production. As a consequence, a new Latin American trade agreement could move toward standards that help trade within the bloc to flow. There has been some movement in this direction lately, such as the negotiations between Brazil and Uruguay in the automotive sector.

If the bloc is to move toward greater integration, other fundamental issues need to be added to the agreements that the MERCOSUR is already party to or is currently negotiating:

* Trade facilitation

* VUCE

* Investments

* Government procurement

* Services

Félix Peña: A World That Is Being Redesigned in Search for Equilibrium

The new global context is demanding that we take initiative in two directions: redesigning agreements and, at the same time, seeking new points of equilibrium between countries. These will be the needs that will dominate the negotiation agenda over the course of the next year both at the global level and within the different regional spheres.

The former concerns redesigning the WTO to create a new space for that responds to the looming uncertainty about the future of the mega-agreements which at one point seemed to be shaping the rules for a new global economic order. This uncertainty has meant that certain aspects of the WTO world order could play a major role in maintaining global trade—for example, certain plurilateral agreements.

Furthermore, the current state of global trade has been caused by the loss of the equilibria that had seemed to be on the horizon. We need to seek out new points of equilibrium from a contemporary perspective. A core issue, therefore, is determining what components we need to redesign, which rulemakers will be able to put forward ideas that will be widely accepted, and what will happen if they are not and the trend toward fragmentation continues. The loss of equilibrium is related to various tensions that have arisen due to recent global phenomena, the most noteworthy of which are:

* The impact of technology on connectivity.

* The growth of the urban middle class, fundamentally in the developing world.

* The difficult task of reconciling flexibility with predictability: designing rules that can stand up to today’s changes and the complexities they entail.

We will need to find lasting points of equilibrium between the different fronts that each country is operating on globally, regionally, subregionally, and within its borders. How will we find these? That is the great challenge that negotiators are currently up against.

Álvaro Ons: An Agenda Short on Credibility and Certainty

Regional integration should be an instrument through which the region’s member countries can develop. We need to strengthen intraregional trade. To achieve this, we must implement an agenda that brings a sense of certainty and credibility to the MERCOSUR. We need to reformulate this economic/trade agreement through a short list of initiatives that are prioritized at the highest level. This would improve how the bloc functions and create a space where we can continue building a functional form of integration. We also need to seek out flexible instruments that will allow us to reconcile national strategies. These might include:

* A dispute settlement mechanism: an instrument to promote normal trade operations by containing any frictions that may arise and improving market access. A mechanism of this sort could be developed by expanding the scope of application of existing procedures. It should anticipate and include compensation for noncompliance with dispute judgments.

* Nontariff restrictions (NTRs): carry out joint analysis work within the MERCOSUR to define how these will be handled. We need to avoid long lists and allow each partner to identify the restrictions that are most relevant to them.

* Safeguards for regional trade: these are connected with the elimination of NTRs and to greater transparency in procedures, deadlines, and intensity. This instrument should focus on encouraging the expansion of intraregional trade.

Beatriz Nofal: Regional Government Procurement: The Key to Competitiveness

Since the financial crisis, the prospects for using smart instruments for productive development have opened up. Many developed countries have government procurement policies that are compatible with their trade commitments. The MERCOSUR could explore this path from a regional perspective. Apart from seeking to improve efficiency and transparency, a 21st-century public procurement policy would leverage innovation and the promotion and development of SMEs for appropriate social and environmental development, among other objectives.

The MERCOSUR should replicate the EU’s Europe 2020 strategy which is oriented toward intelligent, sustainable, and inclusive growth which also guarantees more efficient use of public funds. This would clearly require a high level of professionalization within the state and close collaboration between the public and private sectors.

The MERCOSUR is the best platform for improving the international integration of its member countries.

Ricardo Rozemberg: Pragmatic Modernization for the MERCOSUR

The MERCOSUR needs to focus its agenda on a limited number of critical core issues. It needs to develop an agenda that contemplates new mechanisms and to update those that have already been included. It must also fine-tune the coordination of its political and technical interests. A much larger volume of business should take place in the context of the MERCOSUR. Progress undoubtedly needs to be made on the government procurement agenda: 15% of global trade is explained by government procurement, and the MERCOSUR is no exception to this rule. We also need to place greater emphasis on the ”escape mechanisms” that make the scheme flexible. Productive integration initiatives should be intensified to help the MERCOSUR adapt to the global trend toward forming value chains. The common external tariff needs to be adapted and incentives should be provided for infrastructure projects.

Fernando Porta: From Restrictions to Dynamic Global Integration

The MERCOSUR’s automotive industry has followed the major global trends for the sector. Any examination of how the sector functions within the region must consider the restrictions that constrain it, such as its limited scale, the lack of dynamism in the region’s autoparts sector, and the market concentration for some inputs, which increases costs. A positive agenda for the sector could aim for:

* The exclusive allocation of certain models both within the MERCOSUR and for other markets.

* The development of global autoparts suppliers seeking to export.

* National regulatory schemes that are compatible with the quest for intraregional equilibrium.

* Export diversification, opening up new markets within South America.

The MERCOSUR could contribute to articulating public policies to strengthen technology use among small-scale agricultural producers in three ways:

* Production: Articulating access to knowledge through the use of new technologies. Focus on agricultural extension services, digital literacy, and mobile-based information services; shared work agenda carried out by the MERCOSUR Special Meeting on Family Farming (REAF) and the Cooperative Program for Agrifood and Agro-industrial Development in the Southern Cone (PROCISUR).

* Financing: Improve national regulations to increase access to financing and the implementation of agricultural insurance programs; work with regional departments for insurance and financing.

The MERCOSUR has an automotive industry that is technologically competitive at the global level. Its plants produce models that are comparable to those of the global market with only a slight lag behind launches in other countries. However, the MERCOSUR has remained passive in the face of the huge changes and innovations that are taking place within the global automotive sector: the regional market is not developing electric or driverless cars. Technological decisions are still being made in other parts of the world and this implies substantial risks for the region’s development strategies. As a consequence, we need to make the effort to look to the future, or to alternative futures in which what we currently take for granted might no longer exist. The automotive sector may no longer be a dynamic driver for growth in the years to come.

A core factor that needs to be rethought is the sector-specific approach to policy-making. This no longer makes sense, because what “sectors” do is articulate a cluster of services and innovations that would be better understood as chains. Future policies need to be approached in these terms and no longer on the basis of possible sector-specific incentives. These chains bring together primary, industrial, and service-based activities. The MERCOSUR may turn out to be a suitable forum for discussing these issues and moving toward initiatives with regional implications.